Annuities Inside Retirement Accounts?

There is a proposal running around the halls of Congress to allow the use of annuities within ERISA-covered Retirement Accounts, including 401(k), 403(b), and traditional Profit Sharing accounts, which today cannot hold traditional annuities. Before forming an opinion, we evaluated some of the Pros and Cons of implementing this change. Remember our long-held question; “Why would you?”

First, we have always had the right to use annuities in our IRAs, simply by making a separate IRA (you can have as many as you want), and having the IRA buy an annuity. The contract is then titled to the IRA, and is subject to the usual rules for IRAs, including Required Minimum Distributions, or RMDs. So why is this different?

The current proposal, if passed, would allow an annuity to be commingled with all the stocks, bonds and cash in a regular (Traditional or Roth) IRA. This has been problematic for fee-only advisors, as annuities have always been commission-based products. Now there are some new annuity products that are not commissionable. That eliminates one barrier to using the annuity within an existing IRA.

But, should this be passed? Let’s examine some arguments, both Pro and Con:

Pro – This would allow an annuity to be purchased inside an ERISA- covered retirement plan, thus not requiring a rollover first

Con – Not performing a rollover to an IRA continues to limit choices and keep costs relatively high in the relatively expensive ERISA Plan

Pro – Annuities are the only financial product that can guarantee an income for the owner for life

Con – Most people already have a retirement annuity (called Social Security), and some have lifetime pensions

Pro – Social Security will seldom provide sufficient lifetime income for most people’s needs, whereas an annuity will furnish lifetime income

Con – Anyone with an IRA can already buy an annuity (inside or outside an IRA), so this could be considered redundant

Pro – Annuities transfer the risk of running out of money to a large annuity company

Con – Annuities are often sold as “investments,” which they are not; they are transfer-of-risk products, designed to emulate the returns on CDs

Based on these factors, there is no clear answer to the basic question. There is one annuity, however, that is already authorized to use inside an existing retirement account. This annuity (called a “QLAC”) is designed for people who have reached the age where Required Minimum Distributions (RMDs) are required by law, but the account owner has no need for more taxable income.

Next week we will examine the use of the Qualified Longevity Annuity Contract, or QLAC.